An investor owns an ETF (Exchange Traded Fund) tracking the ASX 200 index as part of his portfolio, and this ETF can generate a continuously compounded dividend yield of 2% per year. Today, the investor can buy the ETF for $50 per unit and sell it for $49 per unit. Meantime, the investor can borrow funds at 7% per year and invest funds at 5.5% per year (both rates are continuously compounded). For what range of half-year forward prices does the investor have no arbitrage opportunities? Just assume there is no bid–offer spread on the forward market.
An investor owns an ETF (Exchange Traded Fund) tracking the ASX 200 index as part of his portfolio, and this ETF can generate a continuously compounded dividend yield of 2% per year. Today, the investor can buy the ETF for $50 per unit and sell it for $49 per unit. Meantime, the investor can borrow funds at 7% per year and invest funds at 5.5% per year (both rates are continuously compounded). For what range of half-year forward prices does the investor have no arbitrage opportunities? Just assume there is no bid–offer spread on the forward market.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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An investor owns an ETF (Exchange Traded Fund) tracking the ASX 200 index as part of his portfolio, and this ETF can generate a continuously compounded dividend yield of 2% per year. Today, the investor can buy the ETF for $50 per unit and sell it for $49 per unit. Meantime, the investor can borrow funds at 7% per year and invest funds at 5.5% per year (both rates are continuously compounded). For what range of half-year forward prices does the investor have no arbitrage opportunities? Just assume there is no bid–offer spread on the forward market.
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